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Hybrid Markets: A Migration to the Screen

The NYSE and other exchanges are planning to transform themselves into hybrid markets in response to Reg NMS. But is this a permanent move or a temporary step that will eventually evolve into screen-based trading?

With market regulation in flux, all eyes are on the New York Stock Exchange as it awaits approval from the U.S. Securities and Exchange Commission for its hybrid-market proposal. This proposal is a bold plan to overhaul the NYSE's traditional floor-based auction-model with a turbo-charged automated trading system.

The NYSE's hybrid plan is designed to blend the strengths of its traditional auction model with the speed of electronic trading by preserving a role for specialists and floor brokers to interact with the electronic platform. "What we're looking to do is blend the best aspects of the electronic platform and the auction platform in a way that broadens choices for customers through immediate access to NYSE liquidity," says Robert McSweeney, senior vice president for competitive position at the exchange.

At the same time, customers will have the opportunity for price improvement and the opportunity to have their large orders represented at the point-of-sale with an agent, underscores McSweeney.

But market observers say the NYSE is going hybrid mainly because of Reg NMS - a proposal for reforming the national market system that pushes floor-based exchanges to operate electronically or risk having their quotes ignored by electronic markets that offer immediate execution.

Even though large institutional players like Fidelity Investments have been calling for reform for years, Jodi Burns, a senior analyst at Celent Communications, says the NYSE's hybrid move is a response to Reg NMS. "If they did nothing and Reg NMS went through, and people could ignore their prices, I would see their market share dropping from 80 percent to 40 percent," says Burns. She sees the hybrid system as something that the NYSE needs to stay alive in the new world created by the SEC-imposed change.

But with the SEC publishing a new version of Reg NMS in December and putting it out for public comment until January, the NYSE could be forced to reshape its plan. The NYSE declined to comment for this article on what course of action it would take in response to the SEC's latest Reg NMS proposal. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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